EU-Russian Energy Relations; Former U.S. Ambassador to Lithuania Keith Smith On The Energy Situation In EU And Ukraine; The Russian Perspective

Russia’s military and diplomatic opposition to the overthrow of former Ukrainian President Viktor Yanukovych has raised concern
that Russia might cut off Ukraine’s gas as it has in previous disputes,
disrupting broader European energy markets. In an email interview, Keith Smith,
a former U.S. ambassador to Lithuania who is currently a distinguished
resident fellow at the Center for European Policy Analysis, explained
how Russia’s leverage over energy markets has changed since it last cut
off gas supplies to Ukraine. The views expressed here are Smith’s and do
not represent those of any organization.

Keith Smith: If Ukraine can stay the course regarding energy reform and attracting
foreign investment in on- and offshore exploration and development, it
should be able to substantially increase domestic production, although
this will take a minimum of three to five years. In the meantime,
Ukraine will have to move even faster on energy efficiency programs, and
ramp up coal production and the use of renewables.

The EU is in a somewhat better position than it was in 2009. The shale
gas “revolution” in the U.S. has given EU countries increased leverage
when negotiating gas prices with Russia. Since the U.S. no longer
requires liquefied natural gas (LNG) imports, the world market is more
favorable to gas importers. Norway is now selling more gas to Europe
than Gazprom. The Russian company now has a more difficult time locking
customers into long-term contracts or take-or-pay agreements as a result
of these greater international gas supplies.

As I mentioned, the enormous development of new gas supplies in the U.S.
has already had a positive spillover effect in Europe. LNG shipments
from Qatar, Norway and Russia that were destined for receiving plants on
the East and West Coasts of the U.S. are now being diverted to Europe
and other consuming countries. In the next few years, even more gas will
be entering the international market from Australia, East and West
Africa and from the U.S. China has an ambitious program to develop shale
gas, and it is on schedule to bring significant amounts to market by
the end of the decade. Another factor affecting Gazprom’s leverage is
China’s purchase of large quantities of gas from Turkmenistan; this is
gas that Russia had expected to control for its own market and for
passing on at a high price to Europe. Russia’s monopoly over gas and oil
exports from the entire Caspian area has diminished greatly, as a
result of supply agreements with China, and in the near future to Europe
via the Trans-Adriatic Pipeline.

2. Excerpts from, "Russia-EU gas relations: The Russian perspective" by Jack. D. Sharples, University of Glasgow, Basees 2012. "BASEES is the UK national learned society for the study of Russia,
Eastern Europe and the former Soviet Union. The main activity of the
association is the annual conference, held normally Cambridge in spring,
with about 300-400 participants drawn from the UK but with many others
from continental Europe and North America as well as Russia and Eastern
Europe" (Source).

The development of the EU into a more liquid, competitive gas market
will continue. Gazprom must adapt to these changing conditions through a
combination of competitive pricing, more flexible contracts (regarding
contract duration and offtake volumes) and asset-swaps of minority
shareholdings in partnership with downstream European energy companies,
in order to retain market share and export volumes.

Russia’s
domestic gas market is expected to become more profitable and
competitive, due to the gradual increase in state regulated prices and
the liberalisation of gas sales. As independent Russian gas producers and
Russian oil companies supply an increasing share of the Russian market,
the need for Gazprom to use export revenues to subsidise domestic
sales will be reduced.

In the long term, post-2020
period, it is possible that increased Russian gas exports to
the Asia-Pacific region in line with projections in Russia’s Energy
Strategy to 2030 (MinEnergo,2009, pg. ) could further reduce Russia’s
dependence on the EU as an export market.

On June 13, 2013, the Jean Monnet Chair in the EU's Eastern
Neighbourhood Relations at Carleton University and the Canada-Europe
Transatlantic Dialogue (CETD) co-hosted a policy workshop on "The
European Union's External Energy Relations: Russian and Canadian
Dimensions" at Carleton in Ottawa, Canada.

"The European Union, of course, is a large energy consumer but it's cursed by geography. It has very little indigenous energy resources, so even if it's Shale in Poland we're looking at, you're still not looking at anywhere near what the European Union is, frankly, going to need come 28 member states next month to be able to decently supply its population and its industrial growth. So, the question I think for those of us who look at energy, who look at the European Union, who look at its foreign policy, is to figure out what it is. Is it a foreign policy actor? Is it an energy actor? Can it make its own policy? Is it a sort of conscious player in that sense? Well, yes, and also no. Clearly, it has a variety of energy policies, and it has climate change policies. . . It has a three-part energy policy. The Union abides by its love of architecture that specializes in three pillars. It continues to have the three pillars of competitiveness, security of supply, and sustainability." (7:55 - 9:02).

"There is a variety of very decent and ongoing, and sometimes unregarded, economic ties between the European Union and Russia. I think [inaudible] and I would use this as an example of neat, complex interdependence. . . They are each an enormously important trade and investment partner for the other. It's virtually impossible to see areas where you could legitimately unpick them in an easy way. It would be absolute catastrophe I think. We've seen imports rise and imports fall, but generally, and the percentages can change, what we continue to see is Russia's natural gas export absolutely dominant with regard to the European Union. And the perennial Russian ambition remaining to be the EU's main source of gas and oil. That should come as no surprise. . . This is going to be the continued geopolitical and technical ambition of the Russian state. They also want to be far more than that though. They want to continue be a main export route, quite naturally, for energy producers along the Central Asian belt, if you like, and also penetrating deeper into Northern and Central Europe. They've already done so with a variety of pipelines, kind of pincer-like sort of movements. And, as we've heard before, this morning, with regards to Eastern diversification, the idea of tapping into the Asian market, something Canada should be thinking a little more sharply about, clearly a major ambition to be a prime supplier. We've also seen Russia at work in Sub-Saharan Africa as well as a new investor, but, again, like China, with a clear view to promoting the exploitation of fossil fuels down there. I think the point is the Russian people and Russian government view themselves not necessarily as anything other than a strategic partner, and Europe's flaw, if you like, has been to sort of treat it, accidentally, as something of a political customer, and that's certainly produced a variety of problems between the two." (19:40 - 21:55).